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New technology not a big deal for in-house counsel

When it comes to cutting costs, spend on external counsel is the primary target for in-house legal teams. In a current IACCM survey, 74% of participants say they are using fixed fee arrangements, detailed billing reviews and panel discounts. Just over 50% have transferred some work back from outside law firms into their organization. Unlike most other business functions, a majority do not see new technology having a major impact on legal costs or resources in the short to medium term.

Law department budgets are under pressure. In common with other areas of the business, there are demands for cost reduction; but at the same time, workload in critical areas is increasing. Balancing these pressures is challenging and has led to a variety of techniques being deployed. However, their effectiveness is proving highly variable.

Is Procurement making inroads?

Legal spend is a category that many Chief Procurement Officers would like to control – but the survey shows that for most this remains a future ambition. Just under 13% of law departments say that they use Procurement on a regular basis to assist in external negotiation of fees or charges and only 6% are actively considering greater engagement.

Alternative fee arrangements – such as outcome or success-based – have likewise made little progress and only a small percentage anticipate future use.

Outsourcing, technology should offer solutions

While a significant proportion have experimented with captive or outsource centers as a source of cost reduction, satisfaction levels vary. Interviews suggest that this is frequently because the framework for success is missing. A reluctance to define procedures or to make use of technology, together with innate resistance to change, have clearly impacted results – and led to over 15% abandoning their efforts.

So perhaps technology will represent the great break-through? Certainly external commentators such as Richard Susskind believe this to be the case. So what about the in-house lawyers? Just over 10% consider there will be an impact in the next 12 months and almost 30% acknowledge that technology will affect internal resources and ways of working in the next 3 years. But for most, significnat change is felt to be at least 5 years away.

And when it happens, where do in-house lawyers believe the biggest impact will fall? That’s simple – it will be on the external law firms.

To participate in this confidential survey and receive the full results, click here. The report will be issued to participants on June 12th and will include insight to the most successful cost reduction techniques currently being used.

Commercial Update: a need for innovative terms

A weekly update on contract and commercial news and trends.

Outsourcing needs new contracts:  Greater leveraging of technology (i.e. Robotic Process Automation [RPA], Artificial Intelligence [AI], and Blockchain), plus a shift to DevOps/ Agile Development approaches, and greater use of output/ outcome based pricing models is forcing a change from traditional (people based) outsourcing agreements, reports Edward Caso, equity analyst at Wells Fargo. However, he observes that contracts are not adjusting fast enough to accommodate these new models.

A new form of Most Favored Customer? The availability of ‘voluntary administration’ as an alternative to bankruptcy is resulting in new contract clauses to protect healthy companies from competitive disadvantage. A feature of administration is that existing supply contracts are frequently renegotiated to generate better terms. Some companies are now inserting clauses requiring equivalence in the event a competitor benefits from this type of renegotiation.

Invoicing errors carry heavy cost: the latest IACCM research report reveals average errors equivalent to 4.3% of invoice value. While buyers increasingly focus on reducing overpayment, to what extent do suppliers undercharge? With new and more sophisticated technologies emerging, invoice accuracy is high on the list of areas for improvement.

Evaluating relationships: A research paper published in the MIT Sloan Review suggests four parameters for reviewing the strength of a supplier or customer relationship. The dimensions to be tested are trust, commitment, dependency and norms (e.g. of behavior). IACCM research has reached similar conclusions and also the extent to which selecting the right commercial model and terms influence these factors.

Learning from Carillion: the collapse of one of the UK’s largest construction and public sector outsourcing companies has inevitably led to many questions. The parliamentary report published last week sheds some light onto the overall lack of commercial insight and judgment by multiple parties. The warning signs were clear – and ignored. The critical need for enhanced skills is obvious, but also the importance of improved systems to automate reporting in today’s complex businesses. And a big question – what role should commercial staff have in challenging management when there is a clear lack of business integrity?



Invoice accuracy: problem or opportunity?

Organizations that institute greater controls over invoice payment achieve, on average, a benefit of around 4.3% of invoice value. That represents a lot of money – so it is worth reading on!

IACCM, in partnership with Zen Enterprise, recently undertook a survey to explore current levels of sophistication in billing and invoicing systems and procedures. 43% of those responding admitted that verification of invoice accuracy is somewhat ‘ad-hoc’ and lacks systems support. Only 13% are “utilising technology to automate and standardise the invoice verification process, including integration to provide independent verification”.

What causes inaccuracy?

The survey indicates that a variety of factors impact the scale of invoicing errors. Not surprisingly, overall business complexity is significant and manifests itself in a variety of ways:

  • Can people understand the contract? Almost 59% of respondents recognize that this is a problem. The structure and the wording often lead to confusion and possible misinterpretation and / or disagreement.
  • In situations where the contract is negotiated, 26% feel that disconnects between those who negotiate and those who implement and manage often creates downstream problems, especially when non-standard prices or charges are involved.
  • 29% say that there is often a lack of clarity over roles and responsibilities for contract management, leading to poor data flows and information exchange.
  • Just over 57% indicate that their organization lacks a sufficient number of people with the right skills to perform effective contract management.

The lack of integrated technology to support invoice generation and validation (just 12.5% have such software) obviously increases the reliance on human skills and accuracy. It would seem that buyers should be asking their suppliers to describe their invoicing methods, to gain understanding of the likely level of inaccuracy.

Points to consider

It is not surprising that the frequency of errors increases when services are involved, although product sales are not immune from error. Discount arrangements often result in mistakes, though any form of ‘custom pricing’ requires added vigilance. Market segmentation leads to extensive granularity in pricing and, unless the supplier has extremely sophisticated software, results in a high likelihood of incorrect billing.

Services inevitably involve variable factors such as use rates, billable hours and differentiated charging levels. These demand robust internal systems within the supplier to capture and record the relevant metrics; they create challenges for customers with regard to undertaking tests to validate invoices. This is the area where the greatest inaccuracies occur – on average, around 6% of invoice value, according to the research results.

Call to action

A significant percentage of respondents do not have consistent and defined operating procedures for billing and invoicing production or checking on complex contracts. Since this is an obvious area of exposure, it clearly merits immediate attention.

As highlighted above, organizational structure often results in poor information flows and unreliable data capture. This is another area for review and improvement, applicable to over 85% of those who responded.

Finally, given the growing complexity of business operations, investment in software support is an obvious step. Digital systems and robotic process automation (RPA) are already leading to rapid improvement in some organizations, but these are a small minority. For the majority of organizations there is a clear business case to invest in technology that will deliver significant productivity gains, eliminate cost leakage, and improve transparency to support informed decision making.

Contracts: developing a quality index

During a recent webinar, a participant asked whether there is such a thing as a ‘contract quality index’ – some method or algorithm by which an organization might judge its contracts.

A typical definition of ‘quality’ goes something like this: it is “the standard of something as measured against other things of a similar kind; the degree of excellence of something”. But of course for this to be meaningful or measurable, we must decide what represents excellence. And that is where the problem comes from.

Defining purpose

If I buy a car, or call a help center, I am quite clear about my purpose in doing so and can judge whether that purpose has been met. I will also be able to compare the experience with other cars or help centers. But what about a contract – what is its purpose? A recent IACCM survey illustrated the dilemma which is that contracts have multiple purposes and their relative importance depends a lot on who you ask.

However, top of the list – and therefore perhaps a good place to begin – is that the purpose of a contract is to ‘provide a record of the rights, responsibilities and obligations of the parties’. So if we use this as the indicator of quality, what measures might we use to determine success? The most obvious would be whether or not there are subsequent disagreements due to different interpretations of those rights, responsibilities and obligations. On that measure, a relatively high proportion of agreements fail the quality test and by understanding the causes of that failure, we could take steps to improve quality (e.g. was it poor drafting, poor negotiation, failure to involve the right people?). Such improvements could then be monitored, allowing a benchmark against both the outside world and against one’s own past performance.

Feature versus Function

But is a contract’s purpose really to provide a record of rights, responsibilities and obligations? On this measure, I could have thousands of perfect contracts and still go out of business. Contracts (certainly those related to sales of goods or services) are core business assets. The mark of a good contract – its function – is whether or not it generates profit. In that context, things like clarity of intent are indicators, not core purpose. Many would argue that the contract is just one contributor to profitability and they would of course be right, but there is increasing evidence that ‘good’ contracts (i.e. those of high quality) are actually major contributors. Contracts often set the tone (e.g. are they fair?) and the context (i.e. are they clear?). They set the framework for operations (i.e. are they understood?) and for managing change (e.g. are they adaptive?).

As these examples indicate, it is certainly possible to create a ‘contract quality index’ so long as you are first clear about the purpose your contract is beig designed to fulfil. Sometimes, this will require healthy internal debate – for example, over the relative importance of a contract being clear and easily understood, versus following traditional structure and wording; or (even more significant) over which terms and conditions really need to be negotiated to support the defined purpose. Such debates are held too rarely – and that, of course, is why very few organizations have any real idea whether their contracts meet any form of quality standard.

Commercial Update: Paying fines, cutting costs and negotiating choice of law

This update offers a summary of contracts and commercial news from the last week. In this edition:

  • FCPA – Agents & Consultants strike again
  • Complexity and Partnering in Construction Projects
  • In-house legal and technology adoption
  • Continuing momentum for blockchain
  • Choice of Law in Cross-Border Sales

Panasonic Avionics settled for total fines of $280m for breaches of the Foreign Corrupt Practices Act. It was accused on entering into agreements with a third-party service provider in China and making payments to ‘consultants’ who never performed consulting work. This is the latest in a long series of accusations against corporations in the defense and aerospace sector, typically involving various forms of third-party intermediaries. Contracts and commercial staff must be vigilant and be ready to question the legitimacy of third-party involvement in major transactions.

In-house legal groups are working harder to control their budgets – in particular through increased use of technology. E-billing and automated invoice review, together with greater use of measured KPIs, are being used to improve the management of spend with external law firms, which represents over 60% of the typical legal department budget, according to research by The Blickstein Group and Exterro. A similar percentage of legal departments report that they are under pressure to cut costs – a topic that is also being explored by IACCM in a current survey (to participate, click here).

Blockchain and the Supply Chain show continuing signs of convergence, with committees from the US Congress due to hold a hearing on the use of the technology this week. Recent announcements from major corporations have confirmed the rapid spread of blockchain, especially in the filed of logistics, where is can automate many steps in the process, especially around traditional paperwork. Among potential break-throughs, blockchain clearly could be a key element in the continuing deabate between the European Union and the UK over how to manage customs controls post-Brexit.

Construction projects are well-known for long delays and substantial cost overruns. IACCM has not been alone in its investigations into why these issues occur with such regularity – and, more important, how they can be avoided. Already we have evidence that traditional contracting practices are a major element in driving the adversarial behaviors that tend to typify the industry. An article on Complexity & Partnering in Construction Projects has just been published in the latest edition of Connect, the magazine of the ICCPM. Members of IACCM will also benefit shortly from the release of findings from an IACCM study of successful major projects in the construction and oil and gas sectors, indicating the contract and commercial practices that underpin that success.

Choice of law in cross-border sales is often a point of contention and a new book seeks to offer guidance on the best ways to determine and resolve the issue. It makes the point that decisions are often not rational and the book seeks to provide negotiators with guidance on how to evaluate the issues and facilitate more efficeint outcomes. IACCM’s research indicates the importance of htis topic in assisting the development of more balanced agreements and also in reducing cycle times for concluding contracts. The book is called ‘Rethinking Choice of Law in Cross-Border Sales’ and is written by Gustavo Moser.

Are ‘comic contracts’ a joke?

Not only are comic contracts not a joke, they are indicative of the way forward. And not only is it socially responsible to make contracts understandable, it is also good business.

It doesn’t matter what statistics you choose, most people cannot understand contracts and many don’t try – they just sign. And of course this attitude relegates ‘the contract’ to a position of limited importance. It is an annoyance when it causes delay, a source of celebration when signed and a potential weapon (or defence) when things go wrong. But a tool for communication? Not really. A brand promise? Rarely. A source of corporate pride? That really is a joke.

It can be different

A recent article by J. Kim Wright illustrates that things don’t have to be this way. For years, IACCM (the International Association for Contract & Commercial Management) has promoted contract simplification and has offered its Contract Design Award to those who design for users, rather than remain stuck in 18th century legal tradition. There are many good reasons for thinking differently – and of course it doesn’t have to involve turning the contract into pictures. Indeed, the section of the article that most struck me was this:

”As they took the long and cumbersome contract apart, they became more and more aware of terms that did not fit their values or culture. They had to reverse-engineer the complex lawyer-focused agreement to get back to the true intentions and needs they wanted to address in the contract. What were they really wanting to accomplish? How would their contract reflect their workplace culture and values?”

Do your contracts reflect your business values?

Throughout my career, I have found most top executives to be disengaged from the contracting process. They see contracts as necessary, but not of real interest or relevance. Yet as the above section illustrates, a contract tells you about a business, its true beliefs and ethics. It is their commitment – or lack of commitment – to the market. As former IBM Chairman and CEO Lou Gerstner once said:”Contracts are about brand image”.

In some of the best and most successful businesses, I have been fortunate in seeing a very different level of executive engagement, where the CEO actually wants to test and align ‘what we say versus what we actually commit’. For many, doing an honest evaluation is a scary, controversial and eye-opening experience because they come to realise the scale of mismatch between their public and marketing statements, compared with the actual commitments contained in the contract. But having that alignment is the real route to sustainable growth, to ensuring true ‘ease of doing business’.

Is it really the case that contracts should be about minimizing commitments or – far worse – trying to take advantage of people, of suppliers, of customers? Is that the standard of ethical behavior to which you and your business  aspire? If not, then it’s time to undertake an evaluation, to bring your contracts into line with your value system – and perhaps to make them something that is designed for users, a source of pride, a communication that can be understood. Now that really would mean that your contracts were not a joke.




Are your contracts undermining your business model?

Business models must be adaptive and often need to change fast. Business models dictate required operational capabilities, commercial policies and practices and market relationships. All of these elements combine to determine the types of contractual relationships and terms that will be needed to support organizational goals and strategies.

There are multiple alternatives for a business model. For example, it might be based on the typical ‘razor and blades’ approach where something is given almost free in order to attract future high-margin sales; or it could be a low-cost model, where power is exerted over a supply chain to compete on price; a bricks and mortar model, as opposed to an on-line platform; a product and services model, as opposed to a lease or ‘as a service’ approach. The list goes on – and of course each of them has an impact on market relationships and the consequent approach to contract terms.

The business challenge

On the surface, it doesn’t sound like it should be especially difficult to shift from one model to another. Of course some are more complicated than others – for example, shifting from a bricks and mortar approach to an on-line presence has proven challenging for many. But doing something like changing terms and conditions is, after all, just a paper exercise.

In reality, it is much harder than that. Contracts are in part a promise to the market, but they are also a protection form the market. They are in many ways ‘where the rubber meets the road’ – what can I confidently commit without taking an unacceptable risk (or put another way, without lying or breaking my word)? And that is where the problem arises, because a shift in business model also requires a shift in capabilities – and often it turns out that intent has outrun reality.

But the problem is bigger than that. Contracts and legal groups frequently don’t have experience in tthe new model and may not know what form the new contracts should take. They also face the question of what to do with existing contracts and relationships, how to manage a transition. Often they encounter internal barriers from groups that either don’t understand or don’t want to make the change.

It’s all about agile

As mentioned in the introduction, market and competitive pressures are causing shifts in business model much more frequently than in the past. Traditionally, contracts and leagl groups tended to wait to be told what to do. That’s no longer good enough. Indeed, high value groups increasingly act as market obervors, proactively monitoring competitive terms and conditions so that they spot the shifts in offerings and identify sources of competitive advantage. Such groups remain in the minority; IACCM capability assessmetns frequently reveal the extent to which contracting practices and terms lag behind corporate goals and strategies. That is not a good thing; contracts and commercial teams need to become the eyes, ears and voice of the business when it comes to commercial policies.